A corporate income tax reading list

The literature on corporate income tax policy can be divided into two broad themes:

1. Efficiency effects: What are the effects of corporate income taxes on such things as investment, output and economic growth?

The main results here are that corporate income taxes have a significant effect on investment and capital formation, and that this in turn leads to lower levels of output. In models in which economic growth is endogenous, corporate taxes reduce growth rates. Moreover, the distortions generated by corporate income taxes are worse than the alternatives (notably income taxes and consumption taxes).

2. Incidence effects: Who bears the burden of corporate income taxes?

The answer is not ‘corporations’. Taxes are ultimately paid by people; the question is which people. In the original Harberger (1962) analysis, the supply of capital was perfectly inelastic: the stock was fixed, and there are no other jurisdictions to which owners of capital could move their assets. Since there was no mechanism by which capitalists could respond to an increase in corporate income taxes, the entire burden would be borne by owners of capital. But in a dynamic, open economy with access to highly flexible capital markets – in other words, a country such as Canada – savers can respond to higher corporate income taxes by shifting investment to other jurisdictions. If the country is small enough to not affect the world rate of return – Canada, again – then investors will always receive the world rate of return. The reduction in productive capacity reduces the demand for labour, and reduces the supply of goods. These changes have the effect of reducing wages and increasing consumer prices.

I’ve added a third category for studies that have Canadian content. (This doesn’t include cross-country studies that use Canadian data.)

Some remarks about how the list is set up:

· Articles are listed in reverse chronological order. One reason for doing so is that the literature reviews in these studies are most up-to-date.

· Where possible, I have provided links to ungated versions of the paper.

· I will be updating the list from time to time; if you think I’ve missed an important study, please let me know.